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Estate PlanningTestamentary TrustsWills

Why You Should Upgrade To A Premium Will

By June 10, 2019 No Comments

Did you know that you can increase the wealth of your loved ones just by adequately preparing your estate? And that you can help protect your loved ones from claims by creditors or their former spouses? This post sets out how you can achieve this by creating a Premium Will that includes a Testamentary Trust.

Key Terms You Need to Understand

Trust – A trust is a structure where the legal owner of the trust asset is separate from the actual person or people who stand to benefit from the asset.

Trustee – The trustee is the legal owner of the trust asset and is responsible for managing the trust. The trustee holds the trust assets for the benefit of the beneficiaries.

Beneficiary – Is the person or people who will receive the benefit of the trust property.

Discretionary Trust – Under a Discretionary Trust, beneficiaries do not have a fixed interest or entitlement to a trust asset. Rather, the trustee has the discretion to distribute trust assets to each beneficiary.

Testamentary Trust – A Testamentary Trust is a Discretionary Trust that is created in a person’s Will. When the will-maker passes away, the Testamentary Trust comes into force. This means that instead of the estate assets passing directly to individual beneficiaries, they are instead placed into a Testamentary Trust.

Family Trust – A Family Trust is a Discretionary Trust that holds family assets. One family member is usually the trustee who holds the assets for the family member beneficiaries. A Family Trust can be established during a person’s lifetime.

How does a Testamentary Trust differ from a Family Trust?

The key difference between a Testamentary Trust and a Family Trust is the tax rates for minors when distributing trust income. Minors who receive income from a Family Trust asset are taxed at a higher rate. This is compared to a Testamentary Trust, where minors are taxed at the same rate as adults.

Check out the table below which shows the difference in tax rates:

* based on 2018–19 financial year resident tax rates

What are the tax benefits of a Testamentary Trust?

When a beneficiary inherits assets through a Testamentary Trust, they can stream income earned on the trust assets to their children or low-income earning spouse.

For Example:

When Bob passes away, he leaves his property to Jane. Jane works full time and earns $100,000 per year. She rents out Bob’s property and receives $30,000 rental income yearly.

Scenario 1 – Simple Will

If Jane receives this rental income directly, her total income is $130,000, making the tax she has to pay $35,597 per year (see the end of this post for our calculations).

Scenario 2 – Premium Will

If Bob instead left his property to Jane through a Testamentary Trust, Jane could stream the $30,000 rental income from the property equally between her minor children, Billy and Suzie. The total tax payable would then only be $24,497 (see the end of this post for our calculations), as both Billy and Suzie are within the tax-free threshold. Doing this will save Jane $11,100 in tax each year! Add this up over a 10-year period and Jane has saved $111,000 in tax.

If Jane decides to sell the property later down the track and makes a capital gain, she can also stream the capital gains tax payable to her children.

Bankruptcy & Family Law Claims

Where assets are passed directly to beneficiaries who are potentially at risk from either a bankruptcy or family law claim, these assets are at risk of being claimed by creditors or your beneficiary’s former spouse.

Gifting your assets through a Testamentary Trust, of which your beneficiary is not a trustee, may help in protecting these assets from such claims. This is because the trustee technically owns the assets and the beneficiary does not have a fixed entitlement to the assets.

Foreign Residents and Capital Gains Tax

Usually when as asset passes to a beneficiary, capital gain or loss is disregarded, and the beneficiary is taken to have acquired the asset on the date of death.

However, this does not apply for foreign residents. When an asset passes directly to a foreign resident, capital gains tax (and loss) is triggered.

You can protect your asset from capital gains tax by leaving the asset to your foreign beneficiary through a Testamentary Trust, where the trustee is an Australian resident and the beneficiary is the foreign resident.

Takeaway Point

Taking the time to plan your estate and having a Premium Will could save your loved ones thousands of dollars and help set them up for a brighter future.

Would you like further information?

If you would like further information on how to better prepare your estate for your loved ones, please contact us today or book an appointment online.

Calculations
Scenario 1 – Jane’s income is $130,000
Jane’s tax bracket: $90,001 – $180,000
Tax on Jane’s income: $20,797 plus 37c for each $1 over $90,000
$130,000 – $90,000 = $40,000
$40,000 x 37% = $14,800
$14,800 + $20,797 = $35,597 tax payable
Scenario 2 – Jane’s income is $100,000 and Billie and Suzie each receive $15,000 rental income
Jane’s tax bracket: $90,001 – $180,000
Tax on Jane’s income: $20,797 plus 37c for each $1 over $90,000
Billie and Suzie’s tax bracket: $0 – $18,200
Tax on Billie and Suzie’s income: $Nil
$100,000 – $90,000 = $10,000
$10,000 x 37% = $3,700
$3,700 + $20,797 = $24,497 tax payable

Disclaimer:

The information contained on this site is for general guidance only.  No person should act or refrain from acting on the basis of such information.  You should seek appropriate professional advice based on your particular circumstances.

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